Draghi's 'Rescue' Might Deepen Pain For The Recession-Hit South

Wikimedia CommonsSuper Mario, as European Central Bank president Mario Draghi has become known, cheered the world's financial markets last week with his bold plan to buy unlimited quantities of crisis-hit governments' bonds to shore up the euro.

But as the action passes to Germany this week, investors will be given a sharp reminder that this is not just a crisis of high finance, but one of messy international politics. Set against the hidebound, ultra-cautious ECB of the single currency's early years, Draghi has been extraordinarily bold, winning approval for "outright monetary transactions" in the teeth of vocal opposition from the Bundesbank.

The plan should bring down borrowing costs for Spain and Italy and break the vicious circle in which investors demand higher interest rates because they fear a country could be forced out of the euro - and the resulting pain would make a euro exit all the more likely. In the longer term, if we ever get there, it should also help Portugal, Greece and Ireland to go back to borrowing in international markets.

But central banks can only do so much: Draghi has no lever to pull which would fix the deep divisions between the "core" economies of Germany and its northern neighbours and the uncompetitive, recession-hit south.

In fact, by yoking the new bond-buying measures to an IMF-brokered austerity programme, he could make the woes of those countries even worse. The experience of Greece has shown what lies ahead for Spain and Italy. Officials from Brussels and Washington will comb through their policies, urging them to sack more civil servants, push up taxes and privatise more public assets, and the resulting slump in demand will make their recessions even deeper and more painful for ordinary people.

Meanwhile, whatever the constitutional court rules this week, German voters will become ever more fearful that they will end up footing the bill: there will be more legal challenges, and more pressure on Angela Merkel to take a yet harsher line.

At the same time, voters in Spain and Italy will surely become increasingly furious and despairing about the penance being extracted from them.

Yet against this toxic political background, Europe's leaders hope they can build new institutions that will require an unprecedented surrender of domestic control over tax, spending and the banking system.